December 28, 2006

Circular No.14
 

Finance Act, 2006 - Explanatory Notes on provisions relating to Direct Taxes

1. Introduction

1.1 The Finance Act, 2006 (hereafter referred to as the Act) as passed by the Parliament, received the assent of the President on the 18-4-2006 and has been enacted as Act No. 21 of 2006. This circular explains the substance of the provisions of the Act relating to direct taxes.

2. Changes made by the Finance Act, 2006

2.1 The Finance Act, 2006 (hereinafter referred to as the Act), has,

(i) specified the rates of income-tax for the assessment year 2006-07 and the rates of income-tax on the basis of which tax has to be deducted and advance tax has to be paid during financial Year 2006-07;

(ii) amended sections 2, 10, 10B, 13, 14A, 17, 36, 40, 43, 43B, 54EC, 54ED, 80C, 80CCC, 80-IA, 80P, 92C, 115JAA, 115JB, 115-O, 115R, 115T, 115WB, 115WC, 120, 139, 139A, 140A, 142, 148, 153, 153B, 155, 194A, 199, 201, 203, 203A, 203AA, 206, 206C, 234A, 234B, 234C, 246A, 272A, 272BB, 273B, of the Income-tax Act, 1961;

(iii) inserted new sections 80AC, 90A, 115BBC, 139B, 271CA in the Income-tax Act, 1961;

(iv) amended rule 3 and rule 4 of Part A of the Fourth Schedule to the Income-tax Act, 1961;

(v) amended section 97 of the Finance (No. 2) Act, 2004;

(vi) amended section 17A of the Wealth-tax Act, 1957.

(vii) increased the rates for levy of securities transaction tax in Chapter VII of the Finance (No. 2) Act, 2004.

3. Rate structure

3.1 Rates of income-tax in respect of incomes liable to tax for the assessment year 2006-07

3.1-1 In respect of income of all categories of taxpayers liable to tax for the assessment year 2006-07, the rates of income-tax have been specified in Part I of the First Schedule to the Act. The rates specified in Part I of the First Schedule to the Act are the same as those laid down in Part III of the First Schedule to the Finance Act, 2005 for the purposes of computation of advance tax, deduction of tax at source from Salaries and charging of tax payable in certain cases during the financial year 2005-06.

3.1-2 The salient features of the rates specified in the said Part I are indicated in the following paragraphs:

3.1-3 Individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person.

Paragraph A of Part I of the First Schedule specifies the rates of income-tax in the case of every individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person (other than a cooperative society, firm, local authority and company) as under:

3.1-4 The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent of the tax payable, as reduced by rebate under Chapter VIII-A, in the case of every individual, Hindu undivided family, association of persons or body of individuals having total income exceeding Rs. 10,00,000. No surcharge would be payable by persons having incomes of Rs. 10,00,000 or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 10,00,000 is limited to the amount by which the income is more than Rs. 10,00,000. For instance, the amount of tax and surcharge on a total income of Rs. 10,20,000 calculated at the rates specified would have been Rs. 2,56,000 and Rs. 25,600 totalling to Rs. 2,81,600. The additional tax liability, as per this computation, incurred as compared to a person having a total income of Rs. 10,00,000 is Rs. 31,600. However, additional income as compared to a person having a total income of Rs. 10,00,000 is only Rs. 20,000. Therefore, a marginal relief is given to the extent of Rs. 11,600 in this case thereby providing that the additional tax liability cannot be more than the additional income. The total tax liability in this case will, therefore, be Rs. 2,70,000 instead of Rs. 2,81,000.

3.1-5 In the case of an artificial juridical person, surcharge would be levied at ten per cent of the income-tax payable on all levels of income.

3.1-6 EDUCATION CESS - An additional surcharge called the Education Cess on Income-tax is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge, in all cases. For instance, if the income-tax computed is Rs. 1,00,000 and the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs. 1,10,000 which works out to be Rs. 2,200. No marginal relief shall be available in respect of the Education Cess.

3.1-7 CO-OPERATIVE SOCIETIES - In the case of every co-operative society, the rates of income-tax have been specified in Paragraph B of Part I of the First Schedule to the Act as under

No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent on the amount of tax computed.

3.1-8 FIRMS - In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part I of the First Schedule to the Act. Surcharge at the rate of ten per cent shall be levied. Education Cess is to be levied at the rate of two per cent on the amount of tax computed.

3.1-9 LOCAL AUTHORITIES - In the case of every local authority, the rate of income-tax has been specified at thirty per cent in Paragraph D of Part I of the First Schedule to the Act. No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent on the amount of tax computed.

3.1-10 COMPANIES - In the case of a company, the rate of income-tax has been specified in Paragraph E of Part I of the First Schedule to the Act. In case of a domestic company, the rate of income-tax is thirty per cent of the total income. The tax computed shall be enhanced by a surcharge of ten per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

In the case of a company other than a domestic company, royalties received from Government or Indian concern under an approved agreement made after 31-3-1961, but before 1-4-1976 is taxed at fifty per cent. Similarly, fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964, but before 1-4-1976, is taxed at fifty per cent. On the balance of the total income of such company, the tax rate is forty per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

3.2 Rates for deduction of income-tax at source from certain incomes during the financial year 2006-07

3.2-1 In every case in which under the provisions of sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax Act, tax is to be deducted at the rates in force, the rates for deduction of income-tax at source during the financial year 2006-07 have been specified in Part II of the First Schedule to the Act.

3.2-2 In the case of a non-resident (not being a company), the rate of deduction of tax at source during the financial year 2006-07 from income by way of royalties or fees from technical services received from the Government or an Indian concern in pursuance of an agreement entered into by it with the Government or Indian concern after the 31-5-1997 but before the 1-6-2005 shall be twenty per cent and in pursuance of an agreement made on or after the 1-6-2005, shall be 10 per cent. In the case of all non-residents, the rate of deduction of tax at source during the financial year 2006-07 from income by way of short-term capital gains referred to in section 111A shall be ten per cent.

3.2-3 In all other cases to which this Part applies; rates for deduction of income-tax at source during the financial year 2006-07 will continue to be the same as those specified in Part II of the First Schedule to the Finance Act, 2005.

3.2-4 The tax deducted at source in each case shall be increased by a surcharge for purposes of the Union as follows:

(i) in the case of every individual, Hindu undivided family, association of persons and body of individuals, at the rate of ten per cent, of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to deduction exceeds Rs. 10,00,000;

(ii) in the case of every firm, artificial juridical person and domestic company at the rate of ten per cent of such tax;

(iii) in the case of every company other than a domestic company, at the rate of two and one-half per cent of such tax.

3.2-5 No surcharge is to be levied on the amount of income-tax deducted in the case of a co-operative society and local authority.

3.2-6 EDUCATION CESS - An additional surcharge called the Education Cess on Income-tax is to be levied at the rate of two per cent, in all cases on the amount of tax deducted, inclusive of surcharge, if any. For instance, if the income-tax computed is Rs. 1,00,000 and the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs. 1,10,000 which works out to be Rs. 2,200.

3.3 Rates for deduction of income-tax at source from Salaries, computation of advance tax and charging of Income-tax in certain cases during the financial year 2006-07.

3.3-1 The rates for deduction of income-tax at source from Salaries during the financial year 2006-07 and also for computation of advance tax payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Act. The rates are the same as those laid down in Part I of the First Schedule to the Act for the assessment year 2006-07. These rates are also applicable for charging income-tax during the financial year 2006-07 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, or assessment of bodies formed for short duration, etc. The rates are as follows:

3.3-2 Individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person

Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of every individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person (other than a co-operative society, firm, local authority and company). The rates are as follows:

3.3-3 The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent of the tax payable, as reduced by rebate under Chapter VIII-A, in the case of every individual, Hindu undivided family, association of persons or body of individuals having total income exceeding Rs. 10,00,000. No surcharge would be payable by persons having incomes of Rs. 10,00,000 or below. As illustrated in para 3.1.4, marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 10,00,000 is limited to the amount by which the income is more than Rs. 10,00,000.

3.3-4 In the case of artificial juridical person, surcharge would be levied at ten per cent of the income-tax payable on all levels of income.

3.3-5 EDUCATION CESS - An additional surcharge called the Education Cess on Income-tax is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge, in all cases. The numerical illustration for the computation of Education Cess is given in para 3.1-6. No marginal relief shall be available in respect of the Education Cess.

3.3-6 CO-OPERATIVE SOCIETIES - In the case of every co-operative society, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. The rates are the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act and are as follows

No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent.

3.3-7 FIRMS - In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part III of the First Schedule to the Act. Surcharge at the rate of ten per cent shall continue to be levied. Education Cess is to be levied at the rate of two per cent.

3.3-8 LOCAL AUTHORITIES - In the case of every local authority, the rate of income-tax has been specified as thirty per cent in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding paragraph of Part I of the First Schedule to the Act. No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent.

3.3-9 COMPANIES - In the case of a company, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding paragraph of Part I of the First Schedule of the Act and shall continue to be the same as specified for assessment year 2006-07.

In case of a domestic company, the rate of income-tax is thirty per cent of the total income. The tax computed shall be enhanced by a surcharge of ten per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

In the case of a company other than a domestic company, royalty received from Government or Indian concern under an approved agreement made after 31-3-1961, but before 1-4-1976 is taxed at fifty per cent. Similarly, in the case of fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964, but before 1-4-1976, is taxed at fifty per cent. On the balance of the total income of such company, the tax rate is forty per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

[Section 2 and First Schedule]

4. Exemption on aircraft lease rentals extended

4.1 Under section 10(15A), any payment made by an Indian company engaged in the business of operation of aircraft to acquire an aircraft or an aircraft engine on lease from the Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government is exempt. This exemption is available subject to the condition that the agreement under which the payment is made is entered into on or before 31-3-2006.

4.2 Further, under clause (6BB) of section 10, any tax payable by the Indian company on behalf of the Government of a foreign State or a foreign enterprise in respect of such lease payments is exempt where the payment is under an agreement entered into on or after 1-4-2006.

4.3 Clause (15A) of section 10 has been amended so as to continue to provide the above-mentioned exemption for lease payments made in pursuance of agreements entered into on or before 31-3-2007. Concomitantly, clause (6BB) of section 10 has been amended to provide the benefit of exemption from grossing up of tax in respect of lease payments made in pursuance of agreements entered into on or after 1-4-2007.

4.4 Applicability - From assessment year 2007-08 onwards.

[Section 4]

5. Exemption of the Constituency Allowances of MLAs

5.1 Under the provisions of section 10(17), the following income is exempt from income-tax:

(i) Daily allowance received by a Member of Parliament or Member of Legislative Assembly or a Member of any Committee of the Parliament or State Legislature.

(ii) Any Constituency Allowance received by a Member of Parliament.

(iii) All other notified allowances up to Rs. 2,000 per month in the aggregate received by a Member of a Legislative Assembly or a Member of any Committee of the State Legislature.

5.2 With a view to bringing uniformity in the tax treatment of allowances received by MPs and MLAs, sub-clause (iii) of clause (17) of section 10 has been substituted to provide that any constituency allowance received by any Member of a State Legislative Assembly under any Act or rules made by the State Legislature will be exempt from tax. Accordingly, as in the case of Members of Parliament, all other allowances, besides daily allowance and constituency allowance, received by a member of a State Legislature will be taxable.

5.3 This amendment will take effect from assessment year 2007-08 onwards.

[Section 4]

6. Providing a time limit for grant/continuance of exemption for certain charitable and religious trusts and institutions and certain educational and medical institutions.

6.1 Under the provisions of section 10(23C)(iv), (v), (vi) and (via), a fund, trust or institution or university or other educational institution or hospital or other medical institution is required to make an application for grant of exemption under the said clauses to the prescribed authority.

6.2 A new proviso has been inserted in section 10(23C) to provide that such application made on or after 1-6-2006 shall be made at any time during the financial year immediately preceding the assessment year from which the exemption is sought.

6.3 Applicability - Assessment year 2007-08 onwards.

[Section 4]

7. Removal of exemption for certain income of Investor Protection Fund

7.1 Under the provisions of section 10(23EA), any income of an Investor Protection Fund set up by recognized stock exchanges in India, either jointly or separately and notified by the Central Government in the Official Gazette, is exempt from income-tax.

7.2 The section has been amended to provide that any income of such Investor Protection Fund by way of contributions received from recognized stock exchanges and the members thereof, alone, will be tax-exempt. All other income of the Fund will be taxable.

7.3 Applicability - Assessment year 2007-08 onwards.

[Section 4]

8. Removal of exemption of income from investment in infrastructure and other projects under section 10(23G)

8.1 Under the provisions of section 10(23G), any income by way of dividends (other than dividends referred to in section 115-O), interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or a co-operative bank from investments made on or after 1-6-1998, by way of shares or long-term finance in any enterprise or undertaking engaged in an approved eligible business, is exempt from tax. The eligible business are those referred to in section 80-IA(4), section 80-IAB(3), a housing project referred to in section 80-IB(10), a hotel project or a hospital project.

8.2 Section 10(23G) has been omitted from the Act, as a result of which income from existing as well as future investments in any eligible business will be taxable.

8.3 Consequential amendments have been made in section 115-O to omit references to section 10(23G).

8.4 Applicability - Assessment year 2007-08 onwards.

[Sections 4 and 25]

9. Exemption of specified income of certain bodies or authorities

9.1 With a view to exempting certain notified bodies or authorities that satisfy certain prescribed criteria, a new clause (42) has been inserted in section 10 of the Act. This clause provides for tax exemption to any specified income arising to a notified non-profit body or authority which has been established, constituted or appointed under a treaty or agreement entered into by the Central Government with two or more countries or a convention signed by the Central Government. It has also been clarified by way of an Explanation therein that the specified income will be such income arising to the body or authority, the nature and extent of which is notified by the Central Government.

9.2 This amendment takes effect retrospectively from 1-4-2006 and applies in relation to the assessment year 2006-07 and subsequent years.

[Section 4]

10. Benefits of certain deductions not to be allowed in cases where return is not filed within the specified time limit

10.1 Section 139(1) casts an obligation on every assessee to furnish the return of income by the due date. With a view to enforce the compliance in this regard by the assessees who are entitled for deduction under section 10B from their income, a proviso (fourth proviso) to sub-section (1) of section 10B has been inserted so as to provide that no deduction under section 10B shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified in sub-section (1) of section 139. Similarly, with a view to enforce the compliance for furnishing the return of income by the due date by the assessees who are entitled for deductions under section 80-IA or section 80-IAB or section 80-IB or section 80-IC from their income, a new section 80AC has been inserted so as to provide that no deduction under section 80-IA or section 80-IAB or section 80-IB or section 80-IC shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified in sub-section (1) of section 139.

10.2 This amendment takes effect retrospectively from 1-4-2006 and applies in relation to the assessment year 2006-07 and subsequent years.

[Sections 5 and 15]

11. Method for allocating expenditure in relation to exempt income

11.1 Section 14A of the Income-tax Act, 1961, provides that for the purposes of computing the total income under Chapter-IV of the said Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. In the existing provisions of section 14A, however, no method of computing the expenditure incurred in relation to income which does not form part of the total income has been provided for. Consequently, there is considerable dispute between the taxpayers and the Department on the method of determining such expenditure.

11.2 In view of the above, a new sub-section (2) has been inserted in section 14A so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall follow the prescribed method if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. Provisions of sub-section (2), will also be applicable in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income.

11.3 Applicability - From assessment year 2007-08 onwards.

[Section 7]

12. Rationalisation of provisions relating to deduction of health insurance premium paid by the employer and exempt status of such payments in the hands of employees

12.1 Any salary due or paid or allowed to an employee by the employer is chargeable to tax under the head salaries. The term salary has been defined in section 17 which, inter alia, includes wages, pension, perquisites or profits in lieu of or in addition to salary. However, clause (iii) of the proviso to clause (2) of section 17, exempts any premium paid by an employer to effect or to keep in force an insurance on the health of such an employee, from the purview of perquisite, provided it is in accordance with the scheme approved by the Central Government for the purposes of section 36(1)(ib). Section 36(1)(ib) refers to a scheme framed by the General Insurance Corporation under section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government.

12.2 Clause (iv) of the proviso to clause (2) of section 17 similarly exempts reimbursement of medical insurance premium of employees provided it is in accordance with the scheme approved by the Central Government for the purposes of section 80D. Section 80D, as amended by the Finance Act, 2001, provides that the scheme should be either a scheme framed by the General Insurance Corporation under the General Insurance Business (Nationalisation) Act, 1972 or it should be in accordance with the scheme framed by any other insurer which is approved by the Insurance Regulatory Development Authority under the Insurance Regulatory and Development Authority Act, 1999.

12.3 Section 36(1)(ib) provides that an employer is entitled to a deduction in the computation of his profits and gains from business or profession, in respect of the amount of any premium paid by cheque by him to keep in force an insurance on the health of his employees. However, the deduction is available only if the insurance is in accordance with a scheme framed by the General Insurance Corporation of India and approved by the Central Government for this purpose.

12.4 With a view to align the provisions of section 36(1)(ib) with those of section 80D, the said clause (ib) has been substituted so as to also provide for a deduction of the amount of any premium paid by cheque by the assessee, as an employer, to keep in force an insurance on the health of his employees under a scheme framed by any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999.

12.5 Further, as a rationalisation measure, the provisions contained in clauses (iii) and (iv) of the proviso to clause (2) of section 17 have been amended so as to provide that any premium paid by the employer or any reimbursement of premium paid by the employees for health insurance schemes of other insurers, approved by the Insurance Regulatory and Development Authority, shall also be exempt from the purview of perquisites.

12.6 Applicability - From assessment year 2007-08 onwards.

[Sections 8 and 9]

13. Definition of infrastructure capital company, infrastructure capital fund and infrastructure facility

13.1 Under the existing provisions of the Income-tax Act, infrastructure capital company and infrastructure capital fund have been defined in clause (23G) of section 10. Further, this definition is also with reference to sections 80-IA and 80-IB. The definitions of infrastructure capital company and infrastructure capital fund existing in clause (23G) of section 10 have been referred in the Income-tax Act in various other provisions. In view of omission of clause (23G) of section 10, section 2 of the Income-tax Act has been amended by inserting clauses (26A) and (26B) to provide for general definitions of infrastructure capital company and infrastructure capital fund.

13.2 These amendments will take effect retrospectively from 1-4-2006 and apply in relation to the assessment year 2006-07 and subsequent years.

13.3 Further, in view of omission of clause (23G) of section 10, infrastructure facility for the purposes of clause (d) of the Explanation of clause (viii) of sub-section (1) of section 36 of the Income-tax Act has been defined, to mean,

(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed;

(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA; and

(iii) an undertaking referred to in sub-section (10) of section 80-IB.

13.4 This amendment will take effect from 1-4-2007 and will, accordingly, apply in relation to assessment year 2007-08 and subsequent years.

[Sections 3, 4 and 9]

13.5 Notification prescribing the conditions to be fulfilled by a public facility to be eligible for notification as infrastructure facility in accordance with the provisions of clause (d) of the Explanation to clause (viii) of sub-section (1) of section 36 has been issued vide S.O. 1152(E) dated 20-7-2006 through which rule 6ABAA has been inserted in the Income-tax Rules, 1962. By another notification vide S.O. 1153(E) dated 20-7-2006 certain public facilities have also been specified as infrastructure facility.

14. Reference to the definition of derivatives

14.1 Under the existing provisions of clause (5) of section 43, an eligible transaction in respect of trading in derivatives carried out in a recognised stock exchange is not deemed to be a speculative transaction. The definition of derivatives was earlier referred to in clause (aa) of section 2 of the Securities Contracts (Regulation) Act, 1956. Through an amendment made in January, 2005 to the Securities Contracts (Regulation) Act, 1956, the said clause (aa) was re-lettered as clause (ac). Accordingly, the reference to the definition of the term derivative has been re-lettered in clause (5) in section 43.

14.2 This amendment will take effect retrospectively from 1-4-2006.

[Section 11]

15. Deduction in the computation of income against taxes paid on income earned outside India not allowable

15.1 Under the existing provisions contained in sub-clause (ii) of clause (a) of section 40, any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains (hereafter income-tax), is not allowed as deduction in the computation of income. Any such tax paid outside India is also not allowable as deduction in the computation of Income. However such tax paid outside India is eligible for credit against tax payable in India on the global income of the person in accordance with the provisions of section 90 or, as the case may be, section 91.

15.2 Doubts have been expressed whether Income-tax paid in a foreign country is eligible for deduction in the computation of profits and gains from business or profession. In this regard, the judicial opinion is divided with overwhelming number of decisions in favour of the Government. Nevertheless, some assessees continue to claim both i.e. income-tax paid in the foreign country, as deduction in the computation of profits and gains from business or profession and as credit against tax payable in India on their global income. This double benefit claimed by some taxpayers is against the legislative intent.

15.3 With a view to ending the judicial conflict, Explanation 1 has been inserted to sub-clause (ii) of clause (a) of section 40 of the Income-tax Act thereby clarifying that any sum paid outside India and eligible for relief of tax under section 90 or deduction from the income-tax payable under section 91 is not allowable, and is deemed to have never been allowable, as a deduction under section 40 of the Income-tax Act. The taxpayers, however, will continue to be eligible for tax credit in respect of income-tax paid in a foreign country in accordance with the provisions of section 90, or as the case may be, section 91.

15.4 This amendment is clarificatory in nature and is inserted in the Income-tax Act on 1-4-2006.

15.5 Another Explanation has been inserted in the aforementioned clause (ii) as Explanation 2 to provide that any sum paid outside India and eligible for relief of tax under newly inserted section 90A will not be allowed as a deduction in the computation of profits and gains of business or profession.

15.6 This amendment will take effect from 1-6-2006.

[Section 10]

16. Interest not actually paid not eligible for deduction under section 43B

16.1 Under the existing provisions contained in clause (d) of section 43B, any sum payable by the assessee as interest on any loan or borrowing referred to in that clause is allowed as deduction in the computation of income if the sum payable as interest is actually paid by the assessee.

16.2 It has come to notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B. A new Explanation 3C has, therefore, been inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment.

16.3 This amendment takes effect retrospectively from 1-4-1989 i.e. the date from which clause (d) was inserted in section 43B and applies in relation to assessment year 1989-90 and subsequent years.

[Section 12]

16.4 Similarly, under the existing provisions contained in clause (e) of section 43B, any sum payable by the assessee as interest on any loan or advances referred to in that clause is allowed as deduction in the computation of income if the sum payable as interest is actually paid by the assessee.

16.5 A clarificatory Explanation similar to Explanation 3C is also required for the purposes of clause (e). A new Explanation 3D has, therefore, been inserted to the effect that if any sum payable by the assessee as interest on any loan or advance, referred to in clause (e) of section 43B, is converted into a loan or advance, the interest so converted, shall not be deemed to be actual payment.

16.6 This amendment also takes effect retrospectively from 1-4-1997 i.e. the date from clause (e) was inserted in section 43B and applies in relation to assessment year 1997-98 and subsequent years.

16.7 Subsequent to the passage of the Finance Bill, 2006 a clarification vide Circular No. 7 dated 17-7-2006 has been issued by the Board. The circular gives a few illustrations to enable the Assessing Officer and the assessee to allow or to claim the correct amount of deduction against actual payment of interest.

[Section 12]

17. Change in definition of long-term specified asset for exemption under section 54EC

17.1 Under the existing provisions of section 54EC capital gains arising from the transfer of a long-term capital asset are exempt from tax, to the extent such gains are invested in a long term specified asset. The expression long term specified asset has been defined in clause (b) of the Explanation to the said section to mean any bond redeemable after three years issued (i) on or after 1-4-2000 by the National Bank for Agriculture and Rural Development, or by the National Highways Authority of India, (ii) on or after 1-4-2001 by the Rural Electrification Corporation Limited, (iii) on or after 1-4-2002 by the National Housing Bank or by the Small Industries Development Bank of India.

17.2 With a view to raise tax revenues and also to channelise funds towards focused development of roads, highways, and rural electrification infrastructure, the provisions of section 54EC have been amended so as to restrict the benefit of tax exemption, only in respect of long-term capital gains invested in those bonds which are redeemable after three years, and are issued by the National Highways Authority of India, or by the Rural Electrification Corporation Limited on or after 1-4-2006 and are notified by the Central Government for the purposes of the said section. Thus, under the amended provisions, the benefits of section 54EC shall be available only if the long-term capital gains are invested on or after 1-4-2006 in the notified bonds of National Highways Authority of India or Rural Electrification Corporation Limited. It may further be clarified that amended provisions of section 54EC are not applicable for assessment year 2006-07.

[Section 13]

18. Withdrawal of exemption under section 54ED

18.1 The existing provisions of section 54ED provide that the capital gains arising from transfer of a long-term capital asset, being listed securities or units of a mutual fund or of the Unit Trust of India shall be exempt from tax, to the extent such gains are invested in equity shares forming part of an eligible issue of capital, made by a public company, and offered for subscription to the public.

18.2 Vide the Finance (No. 2) Act, 2004. Securities Transaction Tax has been levied on the value of certain specified transactions of equity shares of a company or units of an equity oriented mutual fund entered into a recognised stock exchange in India. Consequent upon the levy of the securities transaction tax, the long term capital gains arising from the transfer of equity share of a company or unit of an equity oriented mutual fund through a recognised stock exchange in India has been made exempt from tax. In view of the same, the provisions of section 54ED have lost their relevance. Accordingly, the provisions of section 54ED have been amended so as to restrict the benefit of the said section only in respect of capital gain arising from the transfer of a long-term capital asset on or before 31-3-2006.

18.3 Applicability - From assessment year 2007-08 onwards.

[Section 14]

19. Extending benefits of section 80C to fixed deposits in banks

19.1 Section 80C provides for a deduction of rupees one lakh to an individual or a Hindu undivided family, with respect to sums paid or deposited in certain specified schemes. The investments or payments eligible for deduction include life insurance premia, contributions to provident fund or schemes for deferred annuities, purchase of infrastructure bonds, payment of tuition fees, repayment of principal amount of housing loans, etc. Further, in order to minimise distortions, there are no sectoral caps and the assessee is free to choose any one or more of the eligible avenues within the overall ceiling specified.

19.2 Sub-section (2) of section 80C, provides that the amount paid or deposited in the previous year in schemes specified in clause (i) to clause (xx) is eligible for deduction under the said section. To provide a level playing field amongst banks and other institutions like insurance companies, mutual funds, etc. a new clause (xxi) in a sub-section (2) of section 80C has been inserted so as to provide that investment in a term deposit for a fixed period of not less than 5 years with any scheduled bank, and which is in accordance with a scheme framed and notified by the Central Government, shall be eligible for deduction under the said section. The expression scheduled bank has also been defined for this purpose. The Bank Term Deposit Scheme, 2006 has been notified on 28-7-2006.

19.3 Clause (xi) of sub-section (2) refers to contribution in the name of any person specified in sub-section (4) of section 80C for participation in any such Unit-linked insurance plan of the LIC mutual fund notified under clause (23D) of section 10 as the Central Government may, by notification, specified. Clause (xiii) of the said sub-section refers to subscription to any units of any mutual fund notified under clause (23D) of section 10 or from the administrator or the specified company under any plan formulated in accordance with such scheme as may be notified by the Central Government. Clause (xiv) of the said sub-section refers to the contribution by an individual to any pension fund set up by any mutual fund notified under clause (23D) of section 10 or by the administrator or the specified company, as the Central Government may, by notification, specify.

19.4 Since clause (23D) of section 10 has since been amended and it also refers to a mutual fund registered under Securities and Exchange Board of India Act, 1992 or regulations made thereunder, the provisions of clauses (xi), (xiii) and (xiv) of sub-section (2) have been amended so as to substitute the words notified under clause (23D) by the words referred to in clause (23D). This amendment is only for the purpose of aligning the provisions of these clauses with that of clause (23D) of section 10.

19.5 Applicability - From assessment year 2007-08 onwards.

[Section 16]

20. Rationalisation of provisions of section 80CCC

20.1 Section 80CCC provides that an assessee, being an individual, shall be allowed a deduction (up to rupees ten thousand) from his total income of the amount paid or deposited by him to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause (23AAB) of section 10.

20.2 Since the deduction available under section 80C and section 80CCC are capped by an overall limit of rupees one lakh, as laid down in section 80CCE, and there are no sectoral caps in section 80C, the provisions of the two sections have been aligned by amending the provisions of section 80CCC so as to increase the limit of investment from rupees ten thousand to rupees one lakh. As mentioned above, the amendment is subject to the overall cap of rupees one lakh provided under section 80CCE.

20.3 Applicability - From assessment year 2007-08 onwards.

[Section 17]

21. Extension of tax benefits to the Power Sector and to Industrial Parks

21.1 Section 80-IA of the Income-tax Act provides for deductions in respect of profits and gains derived by industrial undertakings or enterprises engaged in development operation and maintenance of infrastructure facility, industrial park or generation, distribution or transmission of power etc. Clause (iv) of sub-section (4) of the said section provides that deduction is available to an undertaking which

(a) is set up in India for generation or generation and distribution of power, if it begins to generate power during the period beginning on 1-4-1993 and ending on 31-3-2006;

(b) starts transmission or distribution by laying a network of new transmission or distribution lines during the period beginning on 1-4-1999 and ending on 31-3-2006;

(c) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on 1-4-2004 and ending on 31-3-2006.

21.2 Under the existing provisions, the deduction is not available to undertakings which start generation, or transmission or distribution by laying a network of new transmission or distribution lines after 31-3-2006, or undertake substantial renovation and modernisation of the existing network of transmission or distribution lines after the said date. With a view to fulfil the commitment of the Government to provide power to all by 2012, sub-clauses (a), (b) and (c) of clause (iv) of sub-section (4) of section 80-IA have been amended to extend the time limit from 31-3-2006 to 31-3-2010.

21.3 Similarly, clause (iii) of sub-section (4) of section 80-IA provides that an undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified by it for the period beginning on 1-4-1997 and ending on 31-3-2006, is eligible for deduction.

21.4 To continue attracting investments to industrial parks, the said clause (iii) has been amended to extend the time limit from 31-3-2006 to 31-3-2009.

21.5 Applicability - From assessment year 2007-08 onwards.

[Section 18]

22. Withdrawal of tax benefits available to certain co-operative banks

22.1 Section 80P, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.

22.2 The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions co-operative bank, primary agricultural credit society and primary co-operative agricultural and rural development bank have also been defined to lend clarity to them.

22.3 Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of income.

22.4 Applicability - From assessment year 2007-08 onwards.

[Sections 3 and 19]

23. Provisions relating to double taxation relief etc.

23.1 Under the existing provisions of section 90, the Central Government is empowered to enter into a Double Taxation Avoidance Agreement with the Government of any country outside India. A need was felt to enable an agreement between specified non-government associations for grant of double taxation relief, with the Central Government subsequently adopting such agreement in order to implement or give effect to the same.

23.2 For this purpose, a new section 90A has been inserted to provide that any specified association in India may enter into an agreement for grant of double taxation relief, avoidance of double taxation, exchange of information or for recovery of income-tax, with any specified association in a specified territory outside India and that the Central Government may by notification in the Official Gazette, make necessary provisions for adopting and implementing such agreement.

23.3 Sub-section (2) of section 90A provides that in respect of such agreement and in relation to an assessee to whom such agreement applies, the provisions of the Income-tax Act will apply to the extent they are more beneficial to the assessee. Sub-section (3) of the said section provides that any term used but not defined in the Income-tax Act or in such agreement will have the same meaning as assigned to it in a notification issued by the Central Government unless the context otherwise requires and such meaning is not inconsistent with the provisions of the Act or the agreement, it has been clarified that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge of levy of tax in respect of such company.

23.4 For this purpose, specified association has been defined to mean any notified institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India, or the laws of the specified territory outside India. Specified territory has been defined to mean any area outside India which may be notified as such by the Central Government for the purposes of the section. Consequential amendments have been made in section 2(37A).

23.5 Applicability - From 1-6-2006 onwards.

[Sections 3 and 20]

24. Rationalisation of provisions relating to Transfer Pricing

24.1 The existing provisions of section 92C provide for computation of arms length price. Sub-section (4) of the said section provides that the Assessing Officer may compute the total income of an assessee on the basis of the arms length price. The first proviso to sub-section (4) provides that where the total income of an assessee as computed by the Assessing Officer is higher than the income declared by the assessee, no deduction under section 10A or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.

24.2 Sections 10A and 10B provide deductions in respect of the profits and gains derived from exports. Section 10AA also provides for deduction of profits and gains derived from exports, in respect of newly established units in Special Economic Zones. Provisions of sub-section (4) of section 92C have been rationalized so as to provide for similar treatment in respect of deduction under sections 10A, 10B and 10AA on the income enhanced by way of computing the income in accordance with Arms length price. Accordingly, the first proviso to sub-section (4) of section 92C has been amended so as to provide that no deduction under section 10AA shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under said sub-section.

24.3 Applicability - From Assessment year 2007-08 onwards.

[Section 21]

25. Taxation of anonymous donations received by wholly charitable trusts or institutions including non-profit educational or medical institutions

25.1 Income of wholly charitable or religious trusts or institutions as well as partly charitable or religious trusts or institutions is exempt from income-tax under sections 11 and 12, subject to the fulfilment, inter alia, of certain conditions of application of income and investment in specified modes. Similarly, income of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (via) or any hospital or other medical institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10, is exempt from income-tax subject to the fulfilment of conditions specified in the said clause.

25.2 With a view to prevent channelisation of unaccounted money to these institutions by way of anonymous donations, a new section 115BBC has been inserted to provide that any income of a wholly charitable trust or institution by way of anonymous donation shall be included in its total income and taxed at the rate of 30 per cent. Anonymous donation made to wholly charitable and religious trusts or institutions, i.e. mixed purpose trusts or institutions shall be taxed only if it is for any university or other educational institution or any hospital or other medical institution run by them. Anonymous donation to wholly religious trusts or institutions will not be taxed.

25.3 Anonymous donation has been defined in the new section to mean any voluntary contribution referred to in section 2(24)(iia) of the Act, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as maybe prescribed.

25.4 Consequential amendments have been made in section 10(23C) and section 13 to provide that any income by way of any anonymous donation which is taxable under section 115BBC, shall be included in the total income of the assessee.

25.5 Applicability - From Assessment year 2007-08 onwards.

25.6 Amendments of clarificatory nature have further been made in section 2(24)(iia) to include in the definition of income, voluntary contributions received by any universi